SK Corp launches combined jumbo monetization

A $1.5 billion ADR and exchangeable into SK Telecom began pre-marketing on Monday.

On completion, the CSFB and Goldman Sachs led deal should not only rank as the largest equity transaction from Korea year-to-date, but also the second largest from Asia overall pending the successful completion of Bank of China's IPO.

The deal revives a plan to monetize a percentage of SK Corp's 32.5% stake in SK Telecom in order to reduce short-term debt at the parent. Having originally mandated an exchangeable last December, the transaction was pulled just before the imposition of a research blackout in January because SK Corp was not happy with the share price performance of its wireless operator, which had slid below its target price of Won290,000 to Won250,000.

At yesterday's close (Wednesday), SK Telecom (SKT) stood at Won269,500, meaning that the group will net Won1.886 trillion ($1.584 billion) from the sale of a 6.24% stake via a 2.5 million share ADR sale and 4.5 million share exchangeable.

The ADR is a fully registered SEC offering and with nine ADRs equaling one share, will comprise a 22.5 million unit deal. The exchangeable is144a eligible and bankers will be hoping that the two deals feed off each other and generate positive momentum in much the same way that Korea Tobacco & Ginseng's $553 million combined ADR and convertible did last October.

On completion of pre-marketing, roadshows are currently scheduled to begin on July 15, with pricing slated for July 25. The remaining syndicate banks comprise HSBC, Lehman Brothers, SK Securities and SG Securities.

One of the important consequences of the deal should be the partial removal of a heavy overhang on SK Telecom's share price. The company accounts for just over 11% of the Kospi, but has badly underperformed as investors wait for SK Corp to reduce its stake. Year-to-date, for example, the stock is up just 0.56% compared to an 8.6% rise in the wider index.

During roadshows, company officials are also likely to be heavily pressed about SK Telecom's intentions towards its main domestic rival Korea Telecom in which it is now the single biggest shareholder. The wireless operator emerged as a surprise bidder to take control of an 11.34% stake during the government's final privatization in May.

Given that KT and SKT combined completely monopolise the domestic cellular market, the move has caused considerable controversy. However, SKT management has said that it was prompted by a desire to stop the main competitor from falling into the hands of a rival chaebol such as Samsung. A stand off between the two has since ensued, although analysts believe that since KT in turn owns a 9.3% stake in SKT, the government will eventual persuade them to conduct a share swap.

Most have a positive view of SKT's broader plans to transform itself from a pure cellular operator into a multi-media giant. Recent initiatives, for instance, include the purchase of Lycos Asia, Korea's third largest internet company, which is being used as a springboard to expand SKT's mobile data services. The company has also announced that it is planning to purchase a 40% stake in Korea Digital Media Centre, a cable TV network in Seoul, through which it hopes to develop internet TV.

Salomon Smith Barney analyst James Kim says that SKT has been particularly successful at migrating existing customers from 2G to 2.5G, which provides 3G quality services over existing 2G spectrum. As of end May, the company had converted 35% of its subscribers, up from 23% at the beginning of the year.

"We think that the predictability and reliability of SKT's earnings plus its role as the country's wireless data pioneer easily justifies a premium to the domestic market and we have a target price of Won330,000 at the moment," Kim says.

Currently, the stock is trading on an EV/EBITDA multiple of roughly six times 2002 earnings and a p/e multiple of about 12 times, in line with the Kospi average.

Kim believes that by the end of the year wireless data should account for about 10% of the company's earnings, up from 7.5% at the end of the first quarter. ARPU rates for wireless data, on the other hand, are still low at around Won3,000 and set to fall further after the company announced tariff cuts of about 48% from July 1 in order to generate more traffic.

To date, analysts say that most mobile data usage has revolved around character downloads, although some have positive views on the development of multi-media messaging (cameras within mobiles that can transmit photos) and over the longer-term, mobile commerce (a marriage between credit cards and mobile phones).

For the parent company, a successful exchangeable should have a very beneficial impact on its short-term debt position. Currently rated BBB-/Baa3, SK Corp had $1.695 billion in short-term debt as of December 2001 and $3.2 billion of long-term debt, equating to a gearing ratio of 87%.

Over the last few years, the company has embarked on an aggressive strategy to de-leverage and term out its debt profile, although both rating agencies have stated that it will not get upgraded until it makes further improvements. At the end of 2000, for example, SK Corp had $6.2 billion in short-term debt and $3.4 billion in long-term debt. During 2001, it was also able to successfully lengthen its maturity profile via a $250 million five-year Eurobond led by CSFB last spring.

Priced on a coupon of 7.5% to yield 255bp over Treasuries, the deal is currently trading to close to 100bp over on a yield of roughly 5%. At these levels, a number of houses rate it as Asia's most expensive dollar bond relative to current Treasury spread and standard deviation.

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